Office Depot Jumps After Starboard Takes 13% Stake

A customer walks out of an Office Depot Inc. store in San Francisco. Photographer: David Paul Morris/Bloomberg

Sept. 17 (Bloomberg) -- Office Depot Inc., the second-largest U.S. office-supplies chain, rose after activist investor
Starboard Value LP became its largest shareholder and started
pushing for changes to improve earnings.

The shares jumped 5.3 percent to $2.60 at the close in New
York. The Boca Raton, Florida-based retailer has gained 21
percent this year.

Starboard Chief Executive Officer Jeffrey Smith wrote in a
letter to Office Depot CEO Neil Austrian today that the
retailer’s “poor operating performance” has hurt the shares.
Starboard, which now owns 13 percent of the chain, said Office
Depot should move to smaller stores and reduce the number of
items it sells. The chain also should cut general expenses and
“significantly” lower advertising costs, Smith said.

The retailer, which has about 1,680 locations worldwide,
has posted four straight years of falling sales and a net loss
of $57.4 million last quarter. Office Depot, Staples Inc. and
OfficeMax Inc. are facing more competition from online retailers
such as Amazon.com Inc. while selling fewer traditional supplies
as more workers use computers, tablets and smartphones.

“Office Depot is one of the more challenged companies in a
troubled sector,” Bradley Thomas, an analyst at KeyBanc Capital
Markets Inc. in New York, said in an interview Sept. 12.

Brian Levine, a spokesman for Office Depot, declined to
comment in an e-mail.

Store Closings

Austrian moved from board member to interim CEO and
chairman after Steve Odland resigned in October 2010. After a
search, the company made him the permanent head of the company
in May 2011. He has since been trying to cut costs and improve
customer service. The company will announce a plan next month
that may include shrinking or closing stores as it has 500
leases up for renewal in the next three years, Kevin Peters,
North American retail president, said earlier this month.

Starboard was founded in March 2011 in a spinoff from Cowen
Group Inc.’s Ramius LLC and has more than $1 billion under
management. The New York-based firm recently lost its fight to
install three new directors at AOL Inc. after saying the company
was spending too much money on failed efforts.

Today’s increase in Office Depot’s stock came after two
gains of more than 19 percent in the past nine trading days. On
Sept. 5, the chain repeated its forecast for earnings before
interest and taxes of as much as $135 million. Starboard also
met with Austrian on Sept. 5, according to the letter. The stock
rose 19 percent that day and climbed 21 percent on Sept. 12.

Merger Speculation

On Sept. 5, Austrian said at an investor conference hosted
by Goldman Sachs Group Inc. that there are too many office-supply stores and it’s “pretty clear today that there’s going
to have to be consolidation at some point.”

There has been speculation that there will be a merger in
the industry since the Federal Trade Commission blocked Staples’
acquisition of Office Depot in 1997 on anti-competitive grounds,
Thomas said. The endgame for Office Depot should be some kind of
joining with OfficeMax, he said. OfficeMax is the third-largest
office-supplies chain after Staples and Office Depot.

A merger of Office Depot and OfficeMax would be
“natural,” Staples Chairman and CEO Ronald Sargent said last
year at a conference. The FTC is more likely to allow such a
combination than if Framingham, Massachusetts-based Staples were
to buy either company, he said.

“The landscape has changed dramatically since 1997, when
the FTC blocked the Staples/Office Depot merger,” Office Depot
said in a statement last year. “However, government approval is
certainly not a given.”